Aviation finance: Fasten your seatbelts

Aviation financing is a hot topic and likely to remain so over the coming years, as the demand for financing deliveries of new aircraft peaks at a time when long term financing becomes unattractive for some of the incumbent banks.

On the one hand, record order books of aircraft manufacturers reflect a period of strong orders buoyed by both new aircraft types and strong demand in the emerging markets. On the other, there are a number of headwinds in the aircraft finance market which may make these orders more difficult to finance, and potentially, more expensive.

The ongoing global economic uncertainty, the European Sovereign debt crisis, the recent downgrading of several European banks and increased difficulty of accessing US dollar funding has raised funding pressure. A number of predominantly European banks who have historically played a key role are retracting from the market. This is causing tensions in the funding market, which have been heightened by the ongoing bank deleveraging process, which in part reflects the impact of new regulations such as Basel III.

Conversely, in tough economic times and a low interest rate environment attractive yields are harder to find. Investors are looking for hard assets with good returns.